A question we often deal with is whether annual accounts affect the sale of a hosting business. We deal with the bulk of those issues in a post here. In this post we are going to look at the revenue a base of monthly accounts produces vs. a base of annual accounts.
The point we'd like to highlight is that there are no revenue differences between a base of annual vs monthly accounts as long as the renewal dates are spread out evenly and they are paying the same price. A base made up of monthly customers gets 1/12th of total annual revenue each month when all customers pay their monthly bill. A base made up of annual customers gets 1/12th of the total annual revenue of the company each month when 1/12th of the customer base renews for another year. For some reason this gets confused and I hope the table below is helpful.
Assume: Two customer bases of 12 customers each. One is all monthly and the other is all annual. Renewals are evenly distributed and the price is $10/mo or $120/yr.
Annual Base Monthly Base
Month# Renew Revenue# Renew Revenue
Jan 1 $ 120 12 $ 120
Feb 1 $ 120 12 $ 120
Mar 1 $ 120 12 $ 120
Apr 1 $ 120 12 $ 120
May 1 $ 120 12 $ 120
Jun 1 $ 120 12 $ 120
Jul 1 $ 120 12 $ 120
Aug 1 $ 120 12 $ 120
Sep 1 $ 120 12 $ 120
Oct 1 $ 120 12 $ 120
Nov 1 $ 120 12 $ 120
Dec 1 $ 120 12 $ 120
Total $ 1,440 $ 1,440
However, there can be very meaningful differences in revenue if the distribution of customer renewal dates is not uniform. For example, take a company that has all annual customers and they all renew in March. If you are looking to buy the company in April, you must be aware that you will get $0 of cash from the customer base for the next 11 months even while GAAP accounting says you have revenue.
As always, if you have any questions please do not hesitate to contact us.
Cheval Capital, Inc.
Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell the stocks mentioned above, a comprehensive discussion of valuation or how to do the calculations discussed. Please be sure to consult your financial advisors when valuing your company, considering the sale of your business or making other financial decisions.